MUMBAI: The Central Board of Directors of India's Reserve Bank has approved the risk-based deposit insurance framework for banks. The 620th meeting of Central Board, chaired by governor Sanjay Malhotra held in Hyderabd on Friday, also discussed the global and domestic economic situations and the associated challenges, according to a Friday statement from the apex bank.
Risk-based deposit insurance premium refers to an insurance pricing system where banks are charged premiums based on their individual risk profiles, as opposed to a flat rate, which is the present framework in the country. This approach aligns the cost of insurance with the level of risk a bank poses to the deposit insurance fund.
Under a risk-based model, financially stronger, well-managed banks with sound risk management practices pay a lower insurance premium, while riskier banks with weaker balance sheets or higher non-performing assets pay a higher premium.
The primary goals of implementing risk-based premium are to incentivise sound risk management and reward prudent behavior with lower costs, reduce moral hazard by discouraging banks from taking excessive risks because they know their deposits are insured and promote fairness by ensuring that riskier institutions bear higher costs rather than being subsidized by safer ones.
The Reserve Bank had in October proposed a shift from the current flat-rate system to a risk-based premium model, effective from the next financial year. The current flat rate of 12 paise per Rs 100 deposit will serve as the ceiling for premium, meaning well-rated banks will pay less, but no bank will pay more than the current rate. For the depositor, the insurance coverage limit of Rs 5 lakh per person, per bank remains unchanged and is paid entirely by the bank, not the individual and the scheme is managed by the Deposit Insurance and Credit Guarantee Corporation, a wholly-owned subsidiary of the RBI.
The present Act mandates the Corporation to pay this amount within 90 days if a bank is placed under moratorium.This limit covers both the principal and accrued interest amount across all deposits (savings, dixed, current, eecurring) held by a customer in the "same right and same capacity" at a single bank. The limit was substantially raised from Rs 1 lakh to Rs 5 lakh in February 2020.
The insurance cover is mandatory for almost all banks operating in the country, including domesitc banks, foreign banks, local area banks, regional rural banks, and co-operative banks, excluding primary co-operative societies. The board also reviewed the activities of select central office departments and the draft report on trend and progress of banking in FY25.
Others who attended the meeting include deputy governors T Rabi Sankar, Swaminathan J, Poonam Gupta, and SC Murmu, along with other directors of the Central Board-- financial services secretary Nagaraju Maddirala, Satish K Marathe, Revathy Iyer, Pankaj Ramanbhai Patel and Ravindra H Dholakia, the statement said.